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GSFC: A volume boost

Oct 31, 2014

Gujarat State Fertilizer & Chemicals Ltd (GSFC) has announced the second quarter results of financial year 2014-2015 (2QFY15). The company has reported around 4.5% YoY growth in sales while net profits have surged by 22.7% YoY during the quarter.

Performance summary

Sales increase by 4.5% YoY during 2QFY15. Revenues from the fertilizer division increased by 13.2% YoY while that from the industrial products division declined by 8.4% YoY.

Caprolactam sales increased to 23,455 MT while Nylon sales increased to 2,486 MT. The sales figures during 2QFY15 were the highest ever achieved in the last 5 years.

Standalone financial performance snapshot

(Rs m)

2QFY14

2QFY15

Change

1HFY14

1HFY15

Change

Income from operations

14,180

14,816

4.5%

24,360

27,248

11.9%

Expenditure

12,656

13,183

4.2%

22,423

24,024

7.1%

Operating profit (EBDITA)

1,524

1,633

7.2%

1,937

3,224

66.4%

Operating profit margin (%)

10.7%

11.0%

8.0%

11.8%

Other income

413

390

-5.5%

552

646

17.0%

Interest

123

39

-68.5%

264

75

-71.6%

Depreciation

362

249

-31.2%

695

521

-24.9%

Profit before tax

1,452

1,736

19.5%

1,531

3,274

113.8%

Tax

438

493

12.3%

462

949

105.2%

Profit after tax/(loss)

1,013

1,243

22.7%

1,069

2,325

117.6%

Net profit margin (%)

7.1%

8.4%

4.4%

8.5%

No. of shares (m)

398.5

Basic earnings per share (Rs)

5.8

P/E ratio (x) *

10.2

*On a trailing 12 month basis

What has driven performance in 2QFY15?

Topline increased by 4.5% YoY in 2QFY15. While revenues from the fertilizer segment increased 13.2% YoY, the same from the Industrial Products segment declined 8.4% YoY. The capro-benzene spread improved during the quarter. Since benzene is the key raw material required to manufacture caprolactam the end product price is dependent upon the movement in benzene prices. However, while benzene prices have been declining caprolactam prices have remained largely stable. This has led to better spreads and improved margins.

Operating profits increased 7.2% YoY during the quarter. Margins of the fertilizer segment registered huge jump (5.5% in 2QFY14 to 12.3% in 2QFY15) during the quarter. However, margins from the Industrial segment went down from 13.6% in 2QFY14 to 10.1% in 2QFY15

The net profits increased 22.7% YoY on the back of strong operating performance, decline in interest & depreciation expenses and low base effect. After a continuous fall in prices of Di-Ammonium Phosphate (DAP) the current quarter witnessed a rise of 6-7%. However, higher power cost (impacted margins) due to poor availability of gas (forms about 12-14% of the overall input cost) continues to remain a concern.

What to expect?

At the current price of Rs 120, the stock is trading at a multiple of 10.2x its trailing 12 month (TTM) earnings. The company continues to remain a strong player in the caprolactam market. In the current quarter, profitability of the fertilizer segment increased by 152.3% YoY. This is predominantly because DAP prices have witnessed a jump of 6-7% on QoQ basis. Going forward, higher production in the fertilizer segment is expected as phosphoric acid's pipeline remains strong. Higher volumes from the Sikka unit should also help.

Further, movement in the DAP pipeline inventory (currently the inventory is low; a high inventory creates a price war as witnessed in the past), power availability and subsidy allocations from the government will be key triggers for the company. Considering buoyant growth prospects we continue to maintain our HOLD view on the stock. However, we would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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